Amazon Reacts to Unprecedented Growth by Investing in Capacity

Amazon.com worldwide paid unit growth was up 53%, and CFO Tom Szkutak said the company was experiencing unprecedented growth - "we're seeing the best growth rates we've seen since 2000," he said. So why was Wall Street concerned about third-quarater results, released on Tuesday? While revenues increased 44% year-over-year (or 39% excluding the favorable impact from year-over-year changes in foreign exchange), net income decreased 73% in the third quarter.

Szkutak said, "With this strong growth, we're investing in a lot of capacity and that's what we've been talking about over the last several quarters, and that's what you're seeing in our Q3 results specifically."

Amazon's third-party sales contributed to Amazon's strong growth - the business is "going very well," according to Szkutak, who said third-party units as a percentage of total units was 38% in the third quarter, up from 35% last year.

Reading Wall Street's take on Amazon.com's third-quarter earnings was reminiscent of the company's early days when analysts judged founder Jeff Bezos harshly for his long term approach to building the business - and Amazon's third quarter 2011 was all about long-term investment.

Szkutak said Amazon has 52 fulfillment centers (FCs) and are building 17 new ones - that's a 33% growth in the number of FCs and is higher than the promised 29% growth promised 3 months ago, when Amazon said it would build 15 new fulfillment centers. That affected Amazon.com's bottom line in Q3 - and they're also investing in a number of different areas to support growth in Amazon Web Services, Kindle, digital content, and more.

The new Kindles are "premium products" offered at "great prices" - and Amazon.com thinks of the lifetime value of the Kindle - "we like what we see." Szkutak's words seemed to allude that Amazon was considering somewhat of a razor/razor blade strategy - that's when razor manufacturers realized they could sell the razor below cost and make profits through the sale of the blades.

Amazon expects to have a record quarter in terms of Kindle device sales, and because of the backend loading of it, content will trail device sales - and ad revenue would trail device sales for Special Offer Kindles. "Those are the things you should think about as you think about our Kindle business," Szkutak said, "We're extremely excited about it."

Szkutak also said it would be very easy to access physical products on the new Kindle Fire.

Amazon.com said active customer accounts exceeded 152 million, and it had more than 2 million worldwide active sellers. Inventory increased 50%, and inventory turns were 10.8, down from 11.8 turns a year ago, as Amazon expanded selection, improved in-stock levels and introduced new categories.

"We're getting ready, as you'd expect, for just a great holiday season for customers overall and for Kindle customers," Szkutak told analysts.

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.

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